Publication 508 Contents

Cat. No. 15012M

Introduction ............................................... 1
Department Qualifying Education................................ 2
of the
Treasury Educational Nonqualifying Education.........................
What Educational Expenses Are
3

Internal
Revenue
Service
Expenses Deductible...........................................
Transportation Expenses....................
Travel Expenses ..................................
4
4
4
Expenses Relating to Tax-Exempt
and Excluded Income .................. 5
For use in preparing
How To Report Reimbursements and

1996 Returns
Educational Expenses .....................
Employer-Provided Education...............
6
7
Recordkeeping.......................................... 8
Example—Filled-In Form 2106 ............... 8
How To Get More Information ............... 8

Important Changes for

1996
Employer-provided educational assis-
tance. The exclusion from income of up to
$5,250 of employer-provided education assis-
tance benefits, which expired for tax years be-
ginning after December 31, l994, will now ex-
pire for tax years beginning after May 31, l997.
However, the exclusion does not apply to
graduate-level courses that begin after June
30, 1996. See Employer-Povided Education,
later. Even though the exclusion will expire for
tax years beginning after May 31, 1997, you
can still exclude benefits for courses that be-
gin before July 1, 1997. See Publication 553,
Highlights of 1996 Tax Changes for a possible
change to ‘‘before July 1, 1997.’’
These changes may entitle you to a
refund of income, social security, and
Medicare taxes. See Refund Proce-
dure for Employees under Employer-Provided
Education.

Standard mileage rate. Generally, if you use

your car for transportation to school, you can
deduct 31 cents per mile. For more informa-
tion, see Using Your Car under What Educa-
tional Expenses Are Deductible.

Limit on itemized deductions. If your ad-

justed gross income is more than $117,950
($58,975 if you are married filing separately),
your itemized deductions may be limited. See
the instructions for Form 1040, Schedule A,
line 28.

Introduction
This publication discusses work-related edu-
cational expenses. You may be able to deduct
these expenses on your tax return as business
expenses. In order to deduct these expenses
you must:
 1) Be working,
2) Itemize your deductions on Schedule A
(Form 1040) if you are an employee, and
3) Meet the requirements discussed under
Qualifying Education.
You can use Figure A as a quick check to
see if your educational expenses are
deductible.
Other educational expenses, such as
costs of sending children to college, are per-
sonal expenses that you cannot deduct.
Useful Items
You may want to see:
Publication
□ 463 Travel, Entertainment, Gift,
and Car Expenses
□ 520 Scholarships and Fellowships
□ 535 Business Expenses
Form (and Instructions)
□ 1040 U.S. Individual Income Tax
Return
□ 2106 Employee Business Expenses
□ 2106–EZ Unreimbursed Employee
Business Expenses
□ Schedule A (Form 1040) Itemized
Deductions
□ Schedule C (Form 1040) Profit or
Loss From Business (Sole
Proprietorship)
□ Schedule C-EZ (Form 1040) Net Profit
From Business (Sole
Proprietorship)
See How To Get More Information, near
the end of this publication for information
about getting these publications and forms.
2) Is part of a program of study that can
qualify you for a new trade or business,
even if you have no plans to enter that
trade or business.
See Nonqualifying Education, later.
Present work. Your education must relate to
your present work. Education that will relate to
work you may enter in the future is not qualify-
ing education. Education that prepares you for
a future occupation includes any education
that keeps you up-to-date for a return to work
or that qualifies you to reenter a job you had in
the past.
Temporary absence. If you stop work for
a year or less and then go back to the same
kind of work, your absence is ordinarily consid-
ered temporary. Education during a vacation,
temporary leave, or other temporary absence
from your job is considered related to your pre-
sent job. However, after your temporary ab-
sence you must return to the same kind of
work.
Example. You quit your biology research
job to become a full-time biology graduate stu-
dent for one year. If you return to work in biol-
ogy research after completing the courses,
the education is related to your present work.
You may even choose to take a similar job with
another employer.
Education Required by
Employer or by Law
Once you have met the minimum educational
requirements for your job, your employer or
the law may require you to get more educa-
tion. This additional education must be re-
quired for you to keep your present salary, sta-
tus, or job. It must serve a business purpose of
your employer and not be part of a program
that will qualify you for a new trade or
business.
When you take more education than your
employer or the law requires, the additional
education is qualifying only if it maintains or
improves skills required in your present work.

Qualifying Education
Education must meet certain requirements
before the expenses of that education can be
deducted. If these requirements are met, the
education is qualifying education. You may be
able to deduct the costs of qualifying educa-
tion even though the education may lead to a
degree.

Requirements. The education must:

1) Be required by your employer or the law
to keep your present salary, status, or job
(and serve a business purpose of your
employer), or
2) Maintain or improve skills needed in your
present work.

Exception. Even if your education meets

one of the requirements above, it is not quali-
fying education if it:
1) Is needed to meet the minimum educa-
tional requirements of your present trade
or business, or

Page 2
See Education To Maintain or Improve Skills,
later.
Example. You are a teacher who has satis-
fied the minimum requirements for teaching.
Your employer requires you to take an addi-
tional college course each year to keep your
teaching job. You take a course and pay for it
yourself. This is qualifying education even if
you eventually receive a master’s degree and
an increase in salary because of this extra
education.
Education To Maintain
or Improve Skills
If your education is not required by your em-
ployer or a law, it must maintain or improve
skills needed in your job to be qualifying edu-
cation. This includes refresher courses,
courses on current developments, and aca-
demic or vocational courses. However,
courses you take that are needed to meet the
minimum educational requirements for your
job or to qualify you for a new trade or busi-
ness are not qualifying education. See Educa-
tion To Qualify for a New Trade or Business,
later.
Example. You repair televisions, radios,
and stereo sets for XYZ Store. To keep up with
the latest changes, you take special courses in
radio and stereo service. These courses main-
tain and improve skills required in your work.
Nonqualifying
Education
If you need education to meet the minimum re-
quirements for a trade or business or if the ed-
ucation is part of a program of study that will
qualify you for a new trade or business, it is
nonqualifying education. You cannot deduct
the costs of nonqualifying education.
Education To Meet
Minimum Requirements
Education needed to meet the minimum edu-
cational requirements for your present trade or
business is nonqualifying education. The mini-
mum education necessary is determined by:
1) Laws and regulations,
2) Standards of your profession, trade, or
business, and
3) Your employer’s requirements.
You have not necessarily met the minimum
educational requirements of your trade or bus-
iness simply because you are already doing
the work.
Once you have met the minimum educa-
tional requirements that were in effect when
you were hired, you do not have to satisfy this
rule again. This means that if the minimum re-
quirements change, any education you need
to meet the new requirements is qualifying
education.
Example 1. You are a full-time engineering
student. You work part time as an engineer for
a firm that will employ you full time as an engi-
neer after you finish college. Although your
college engineering courses improve your
skills in your present job, you have not met the
minimum job requirements for a full-time engi-
neer. The education is nonqualifying
education.
Example 2. You are an accountant and
you have met the minimum educational re-
quirements of your employer. Your employer
later changes the minimum educational re-
quirements and requires you to take college
courses to keep your job. These additional
courses are not minimum requirements be-
cause you already have satisfied the initial
minimum requirements. The education is qual-
ifying education.
However, a new accountant coming into
the firm would have to satisfy these new mini-
mum requirements. The education the new ac-
countant would need to meet the new mini-
mum requirements would be nonqualifying
education.
Example 3. You have your own accounting
business. To improve your skills, you take sev-
eral courses in tax accounting. You already
have met the minimum educational require-
ments to be an accountant. These courses im-
prove skills required in your business and are
not part of a program of study that will qualify
you for a new trade or business. These
courses are qualifying education.
Requirements for Teachers
This discussion applies to teachers and others
employed by educational organizations. The
minimum educational requirement for teach-
ers is usually set by the state or school district.
It is based upon a minimum number of college
hours or a college degree usually required of a
person hired for that position.
If no requirements exist, you will have met
the minimum educational requirement when
you become a faculty member. You generally
will be considered a faculty member when one
of the following occurs:
1) You have tenure,
2) Your years of service count toward ob-
taining tenure,
3) You have a vote in faculty decisions, or
4) Your school makes contributions for you
to a retirement plan other than social se-
curity or a similar program.
Example 1. Your state law requires begin-
ning secondary school teachers to have a
bachelor’s degree, including ten professional
education courses. In addition, to keep the job,
a teacher must complete a fifth year of training
within 10 years from the date of hire. If the em-
ploying school certifies to the State Depart-
ment of Education that qualified teachers can-
not be found, the school may hire persons with
only 3 years of college. However, to keep their
job, these teachers must get a bachelor’s de-
gree and the required professional education
courses within 3 years.
Under these facts, the bachelor’s degree,
whether it includes the ten professional edu-
cation courses or not, is considered the mini-
mum educational requirement for qualification
as a teacher in your state.
If you have all the required education ex-
cept the fifth year, you have met the minimum
educational requirements. However, if the fifth
year will qualify you for a new trade or busi-
ness, it is nonqualifying education. See Educa-
tion To Qualify for a New Trade or Business,
later.
Example 2. Assume the same facts as in
Example 1. If you have a bachelor’s degree
and only six professional education courses,
the additional four education courses would
be qualifying education. Because a bachelor’s
degree is the minimum requirement for qualifi-
cation as a teacher, you have already met the
minimum requirements, even though you do
not have all of the required courses.
Example 3. Assume the same facts as in
Example 1. If you are hired with only 3 years of
college, the courses you take that lead to a
bachelor’s degree (including those in educa-
tion) are nonqualifying education. They are
needed to meet the minimum education for
employment as a teacher.
Example 4. You have a bachelor’s degree
and you work as a temporary instructor at a
university. At the same time, you take gradu-
ate courses toward an advanced degree. The
rules of the university state that you may be-
come a faculty member only if you get a gradu-
ate degree. Also, you may keep your job as an
instructor only as long as you show satisfac-
tory progress toward getting this degree. You
have not met the minimum educational re-
quirements to qualify you as a faculty member.
The graduate courses are nonqualifying
education.
Certification in a new state. Once you have
met the minimum educational requirements
for your state, you are considered to have met
the minimum educational requirements in a
new state, even if you must take additional ed-
ucation to be certified in the new state. Any ad-
ditional education you need is qualifying
education.
Example. You hold a permanent teaching
certificate in State A and are employed as a
teacher in that state for several years. You
move to State B and are promptly hired as a
school teacher. You are required, however, to
complete certain prescribed courses to get a
permanent teaching certificate in State B.
These additional courses are qualifying edu-
cation because the teaching position in State
B involves the same general kind of work for
which you were qualified in State A. You have
already met the minimum requirements for
teaching and have not entered a new trade or
business.
Page 3
Education To Qualify for a
New Trade or Business
Education that is part of a program of study
that can qualify you for a new trade or busi-
ness is nonqualifying education. This is true
even if you are not seeking a new job.
If you are an employee, a change of duties
is not a new trade or business if the new duties
involve the same general work you did in your
old job.
Example 1. You are an accountant. Your
employer requires you to get a law degree at
your own expense. You register at a law
school for the regular curriculum that leads to
a law degree. Even if you do not intend to be-
come a lawyer, the education is nonqualifying
because the law degree will qualify you for a
new trade or business.
Example 2. You are a general practitioner
of medicine. You take a 2–week course to re-
view new developments in several specialized
fields of medicine. The course does not qualify
you for a new profession. It is qualifying educa-
tion because it maintains or improves skills re-
quired in your present profession.
Example 3. While working in the private
practice of psychiatry, you enter a program to
study and train at an accredited psychoana-
lytic institute. The program will lead to qualify-
ing you to practice psychoanalysis. The psy-
choanalytic training does not qualify you for a
new profession. It is qualifying education be-
cause it maintains or improves skills required
in your present profession.
Bar or CPA Review Course
Review courses to prepare for the bar exami-
nation or the certified public accountant (CPA)
examination are nonqualifying education.
These are personal expenses that qualify you
for a new profession.
Qualifications for Teachers
All teaching and related duties are considered
the same general kind of work. If you change
duties in any of the following ways, it is not
considered a change to a new business.
1) Elementary school teacher to secondary
school teacher.
2) Teacher of one subject, such as biology,
to teacher of another subject, such as art.
3) Classroom teacher to guidance
counselor.
4) Classroom teacher to school
administrator.
What Educational
Expenses
Are Deductible
If your education meets the requirements de-
scribed earlier under Qualifying Education,
you can generally deduct your educational ex-
penses if you itemize your deductions or if you
are self-employed. However, see Expenses
Page 4
Relating to Tax-Exempt and Excluded In-
come, later.
Deductible expenses. The following educa-
tional expenses can be deducted.
1) Tuition, books, supplies, lab fees, and
similar items.
2) Certain transportation and travel costs.
3) Other educational expenses, such as
costs of research and typing when writing
a paper as part of an educational
program.
Nondeductible expenses. Educational ex-
penses do not include personal or capital ex-
penses. For example, you cannot deduct the
dollar value of vacation time or annual leave
you take to attend classes. This amount is a
personal expense.
Unclaimed reimbursement. If you do not
claim reimbursement that you are entitled to
receive from your employer, you cannot de-
duct the expenses that apply to the reimburse-
ment. For example, your employer agrees to
pay your educational expenses if you file a
voucher showing your expenses. You do not
file a voucher, and you do not get reimbursed.
Because you did not file a voucher, you cannot
deduct the expenses on your tax return.
Transportation Expenses
If your education qualifies, you can deduct lo-
cal transportation costs of going directly from
work to school. If you are regularly employed
and go to school on a strictly temporary ba-
sis, you can also deduct the costs of returning
from school to home. A temporary basis is ir-
regular or short-term attendance, generally a
matter of days or weeks.
If you are regularly employed and go di-
rectly from home to school on a temporary ba-
sis, you can deduct the round-trip costs of
transportation in going from your home to
school to home. This is true regardless of the
location of the school, the distance traveled,
or whether you attend school on non-work
days.
Transportation expenses include the ac-
tual costs of bus, subway, cab, or other fares,
as well as the costs of using your own car.
Transportation expenses do not include
amounts spent for travel, meals, or lodging
while you are away from home overnight.
Using Your Car
If you use your car for transportation to school,
you can deduct your actual expenses or use
the standard mileage rate to figure the amount
you can deduct. The standard mileage rate for
1996 is 31 cents per mile. If you use either
method, you may also deduct parking fees and
tolls. See Publication 463 for information on
deducting your actual expenses of using a car.
Example 1. You regularly work in Camden,
New Jersey, and go directly from work to your
home. You also attend school every night for 3
weeks to take a course that improves your job
skills. Since you are attending school on a
temporary basis, you can deduct your daily
round-trip transportation expenses in going
between home and school. This is true regard-
less of the distance traveled.
Example 2. Assume the same facts as in
Example 1 except that on certain nights you
go directly from work to school and then
home. You can deduct your transportation ex-
penses from your regular work site to school
and then home.
Example 3. Assume the same facts as in
Example 1 except that you attend the school
for 6 consecutive Saturdays, non-work days.
Since you are attending school on a tempo-
rary basis, you can deduct your round-trip
transportation expenses in going between
home and school.
Example 4. Assume the same facts as in
Example 1 except that you attend classes
twice a week for one year. Since your attend-
ance in school is not considered temporary,
you cannot deduct your transportation ex-
penses in going between home and school. If
you go directly from work to school, you can
deduct the one-way transportation expenses
of going from work to school. If you go from
work to home to school and return home, your
transportation expenses cannot be more than
if you had gone directly from work to school.
Travel Expenses
You can deduct expenses for travel, meals
(subject to the 50% limit), and lodging if you
travel overnight to obtain qualified education
and the main purpose of the trip is to attend a
work-related course or seminar. However, you
cannot deduct expenses for personal activi-
ties, such as sightseeing, visiting, or
entertaining.
If your travel away from home is mainly per-
sonal, you cannot deduct all of your expenses
for travel, meals, and lodging. However, during
the time you attend the qualified educational
activities, you can deduct your expenses for
lodging and 50% of your expenses for meals.
Whether a trip’s purpose is mainly per-
sonal or educational depends upon the facts
and circumstances. An important factor is the
comparison of the amount of time spent on
personal activities and educational activities. If
you spend more time on personal activities,
the trip is considered mainly educational only if
you can show a substantial nonpersonal rea-
son for traveling to a particular location.
Example 1. John works in Newark, New
Jersey. He traveled to Chicago to take a de-
ductible one-week course at the request of his
employer. While there, he took a sightseeing
trip, entertained some personal friends, and
took a side trip to Pleasantville for a day. Since
the trip was mainly for business, he can deduct
his round-trip airfare to Chicago, but he cannot
deduct his transportation expenses of going to
Pleasantville. Only the meals and lodging con-
nected with his educational activities can be
claimed as educational expenses.
Example 2. Sue works in Boston. She
went to a university in Michigan to take a quali-
fying course for work. She took one course,
which is one-fourth of a full course load of
study. She spent the rest of the time on per-
sonal activities. Her trip is mainly personal be-
cause three-fourths of her time is considered
personal time and her reasons for taking the
course in Michigan were all personal. She can-
not deduct the cost of the train ticket, but she
can deduct one-fourth of the meals (subject to
the 50% limit) and lodging costs for the time
she attended the university.
Example 3. Dave works in Nashville and
recently traveled to California to take a de-
ductible 2-week seminar. While there, he
spent an extra 8 weeks on personal activities.
The facts, including the extra 8-week stay, in-
dicate that his main purpose was to take a va-
cation. He cannot deduct his round-trip airfare
or his meals and lodging for the 8 weeks. He
can deduct only his expenses for meals and
lodging for the 2 weeks he attended the
seminar.
Cruises and conventions. Certain cruises
and conventions offer seminars or courses as
part of their itinerary. Even if these are work-
related, your deduction for travel may be lim-
ited. This applies to:
1) Travel by ocean liner, cruise ship, or other
form of luxury water transportation, and
2) Conventions outside the North American
area.
The limits for educational purposes
are the same that apply to cruises
and conventions for other business
purposes. These are discussed under Luxury
Water Travel and Conventions in Publication
463.
Meal Expenses
If your educational expenses qualify for de-
duction, you can deduct the cost of meals that
qualify as travel expenses.
50% limit. You can deduct only 50% of your
qualifying business-related meals if you were
not reimbursed by your employer. This in-
cludes meals while traveling away from home
to obtain your education.
Employees must use Form 2106–EZ or
2106 to apply the 50% limit. See the instruc-
tions for Form 2106–EZ or 2106 to figure the
50% limit.
For more information on expenses for
travel, meals, and lodging, see Publi-
cation 463. Travel expenses for quali-
fying education are treated the same as travel
expenses for other employee business
purposes.
Travel as Education
You cannot deduct the cost of travel that in it-
self is a form of education even though the
travel may be directly related to your duties in
your work or business.
Example. You are a French language
teacher. While on sabbatical leave granted for
travel, you traveled through France to improve
your knowledge of the French language. You
chose your itinerary and most of your activities
to improve your French language skills. You
cannot deduct your travel expenses as educa-
tional expenses, even though you spent most
of your time visiting French schools and fami-
lies, attending movies or plays, and learning
French in similar activities.
Expenses Relating to
Tax-Exempt and Excluded
Income
Some educational assistance you receive may
be tax-exempt or excluded from income. This
is income you receive that you are not required
to report on your tax return. The rules for de-
termining whether any item is taxable or not
taxable are not discussed here. See Publica-
tion 525, Taxable and Nontaxable Income, for
information on the rules on tax-exempt
income.
The following discussions illustrate how to
treat qualified educational expenses that are
related to several tax-exempt or excluded
sources: scholarships, veterans’ educational
assistance, and the education savings bond
program.
Scholarships
If you receive a tax-exempt scholarship, you
must subtract the amount of the scholarship
from your qualified educational expenses.
Example 1. Your tuition for qualifying edu-
cation is $8,000. You receive a tax-exempt
scholarship of $6,000 to help pay the tuition.
You can include only $2,000 ($8,000 –
$6,000) as qualified educational expenses.
Part of scholarship is tax exempt. If only
part of your scholarship is tax exempt, you
subtract only the expenses related to the tax-
exempt part from your qualified educational
expenses.
Example 2. Your tuition for qualifying edu-
cation is $8,000. You receive a $6,000 schol-
arship of which $4,000 is tax exempt and
$2,000 is taxable. You can include only $4,000
($8,000 – $4,000) as qualified educational
expenses.
Part of tuition qualifies. If only part of your tu-
ition is for qualifying education, you subtract
only part of the tax-exempt scholarship from
the qualifying education.
Example 3. Your total tuition is $8,000.
The tuition for the courses that are qualifying
education totals $3,200. Your tax-exempt
scholarship is $6,000. To determine the part of
the scholarship that must be subtracted from
the qualified education, multiply the scholar-
ship ($6,000) by a fraction.
The top number of the fraction is the tuition
for qualifying education, $3,200, and the bot-
tom number is the total tuition, $8,000. The re-
sult, $2,400, is the amount of the scholarship
you must subtract from your qualifying educa-
tion. You can include $800 ($3,200 – $2,400)
as a qualified educational expense.
For more information on scholarships, see
Publication 520.
Veterans
Any educational assistance payment you re-
ceive from the Department of Veterans Affairs
(VA) is tax exempt. You must subtract the part
of the VA payment that applies to qualifying
education from your qualified educational
expenses.
Some VA programs may include payments
for subsistence or other personal expenses,
and these payments are also tax exempt.
VA programs that pay educational ex-
penses only. If you receive payments under a
VA program that pays only for educational ex-
penses, such as tuition, books, and similar ex-
penses, you must subtract the part of the VA
payment that applies to qualifying education
from your qualified educational expenses.
Example. Your tuition is $1,000 and all
classes are qualifying education. You receive
a $780 educational assistance payment from
the VA that is solely for qualifying education.
You can only include $220 ($1,000 – $780) as
qualified educational expenses.
VA programs that pay living expenses and
educational expenses. If you receive pay-
ments under a VA program that pays for both
living expenses and educational expenses,
you must separate payments for educational
assistance from those for subsistence. You
subtract only the educational part of the VA
payment that applies to qualifying education
from your qualified educational expenses.
Generally, 50% of the VA payments are for
subsistence or living expenses. For married
veterans, the percentage will increase.
Example. Your tuition is $1,000 and all
classes are qualifying education. You receive
a $780 educational assistance payment from
the VA. Under this program, 50% of the pay-
ment is for living expenses. 50% is for educa-
tional expenses ($780 × .50 = $390). You
can include $610 ($1,000 – $390) as qualified
educational expenses.
VA payments used for both qualifying and
nonqualifying education. If you use a VA
payment for both qualifying and nonqualifying
education, you must allocate the payment you
receive. To find out what part of the VA pay-
ment to subtract from the qualified education,
multiply the VA payment by a fraction. The nu-
merator (top number) is the cost of the qualify-
ing education. The denominator (bottom num-
ber) is the total of your qualifying and
nonqualifying educational expenses.
Example. Your tuition and fees for three
courses are $1,500. Only two of the three
courses are qualifying education. The two
courses cost $1,000. You receive a $780 edu-
cational assistance payment from the VA
under a program that covers tuition and fees
only. The payment did not include any amount
for living expenses. Since two-thirds ($1,000/
$1,500) of the total expenses are qualifying,
subtract two-thirds of the VA payment (2/3 ×
$780 = $520) from the $1,000 cost of the two
work-related courses. You can include $480
($1,000 – $520) as qualified educational
expenses.
Page 5
Education Savings
Bond Program
You may be able to exclude from income all or
part of the interest you received on the re-
demption of qualified Series EE U.S. Savings
Bonds during the year if you pay qualified
higher educational expenses during the same
year. This exclusion is known as the Education
Savings Bond Program. If you excluded inter-
est under the Education Savings Bond Pro-
gram, you must subtract the excluded interest
from your qualified educational expenses. See
Chapter 1 in Publication 550, Investment In-
come and Expenses for more information on
excluding the savings bond interest.
How To Report
Reimbursements
and Educational
Expenses
This section explains how to treat any reim-
bursements you received for educational ex-
penses and how to figure your deduction for
educational expenses.
If you are an employee, you must take into
account any reimbursement you receive. How
you treat the reimbursement depends on the
type of reimbursement arrangement and the
amount of the reimbursement. After you have
determined how to treat reimbursements, if
any, you will be able to figure your deduction
for educational expenses. How you deduct
and report these expenses on your tax return
is discussed later in this section.
If you are self-employed, you can skip the
sections on reimbursements and go to the
rules for reporting your deduction. Those rules
are explained later under Where To Deduct
Expenses.
How To Treat
Reimbursements
How you treat any reimbursements you re-
ceive depends on the arrangement you have
with your employer.
No separate reimbursement. If you are paid
a salary or commission with the understanding
that you will pay your own expenses, then you
are not reimbursed or given an allowance for
your expenses. All of your salary or commis-
sion is included on Form W–2 and must be re-
ported as income.
Types of reimbursement arrangements.
There are two basic types of reimbursement
arrangements —accountable plans and
nonaccountable plans. You can tell the type
of plan you are reimbursed under by the way
the reimbursement is reported on your Form
W–2.
Accountable plans. If you are reimbursed
under an accountable plan, your employer
should not include any reimbursement in your
income in box 1 of your Form W–2. To be an
Page 6
accountable plan, your employer’s reimburse-
ment arrangement must require you to meet
the following rules:
1) Your expenses must be business-related,
2) You must adequately account to your em-
ployer within a reasonable period of time,
and
3) You must return any excess reimburse-
ment or allowance within a reasonable
period of time.
Any part of your reimbursement that does not
meet one of these three rules is considered
paid under a nonaccountable plan.
Expenses equal reimbursement. If your ex-
penses equal your reimbursement, you do not
complete Form 2106 or Form 2106–EZ. You
have no deduction since your expenses and
reimbursement are equal.
Excess expenses. If your expenses are more
than your reimbursement, you can deduct your
excess expenses. These rules are discussed
later under Where To Deduct Expenses.
Nonaccountable plans. Your employer will
combine the amount of any reimbursement or
other expense allowance paid to you under a
nonaccountable plan with your wages, salary,
or other compensation and report the total in
box 1 of your Form W–2.
You can deduct your expenses regardless
of whether they are more than, less than, or
equal to your reimbursement. These rules are
discussed later under Where To Deduct Ex-
penses. An example of a filled-in Form 2106 il-
lustrating a nonaccountable plan is shown
later.
Reimbursement for
Nondeductible Expenses
If your employer reimbursed you for expenses
of education that you need to meet the mini-
mum requirements for your job or that can
qualify you for a new trade or business, you
must report the reimbursement in your gross
income.
Amount for Meals
Included in Reimbursement
If your employer paid you one amount under
an accountable plan for both meal expenses
and other qualified educational expenses and
it is not clear how much of the reimbursement
is for each type of expense, you must allocate
the reimbursement to figure out what part is for
meals and what part is for other expenses.
This is necessary to apply the 50% limit to
your meal expenses.
Allocate your reimbursement as follows.
1) Divide your meal expenses by your total
expenses.
2) Multiply your total reimbursement by the
result from (1). This is reimbursement for
your meal expenses.
3) Subtract the amount figured in (2) from
your total reimbursement. The difference
is reimbursement for your other qualified
educational expenses.
Example. Your employer paid you an ex-
pense allowance of $2,000 under an account-
able plan. The allowance was to cover all of
your expenses of traveling away from home to
take a 2-week training course for work. There
was no indication of how much of the reim-
bursement was for each type of expense. You
account to your employer for your expenses
and they actually equal $2,500 ($425 for
meals + $700 lodging + $150 transportation
expenses + $1,225 for books and tuition).
To allocate the reimbursement between
the meal expenses and other expenses of
qualified education (including lodging, trans-
portation, books and tuition while traveling
away from home), take the following steps.
First, divide your meal expenses by your total
expenses ($425 ÷ $2,500). The result is .17.
Then multiply $2,000 (your reimbursement) by
.17. The result is $340 (the amount of reim-
bursement allocated for your meals). The re-
mainder of the reimbursement, $1,660
($2,000 – $340), is the amount of the reim-
bursement allocated for all other expenses.
Where To Deduct Expenses
Self-employed persons and employees report
their educational expenses differently.
The following information explains what
forms you must use to deduct your qualified
educational expenses discussed earlier under
What Educational Expenses are Deductible.
Self-employed persons. If you are self-em-
ployed, you must report your qualified educa-
tional expenses on the appropriate form used
to report your business income and expenses.
For example, if you are a sole proprietor or
an independent contractor, use Schedule C,
Schedule C–EZ, or Schedule F. If you use
Schedule C, list and total your educational ex-
penses for tuition, books, laboratory fees, and
similar items in Part V and enter the total on
line 27. List your car and truck expenses on
line 10. Enter your travel expenses on line 24a.
Enter your meals and entertainment on line
24b. For more information see the instructions
for the form that you file.
Employees. If you are an employee, you gen-
erally must report your qualified educational
expenses on the forms in the following list of
rules for deducting the expenses. To deduct
these expenses:
1) Your paid expenses must be for qualified
education.
2) The amount you deduct must be
unreimbursed.
3) You must file Form 1040.
4) You must itemize your deductions on
Schedule A (Form 1040). You can deduct
only your expenses that are more than
2% of adjusted gross income (Form
1040, line 31). This 2% limit is applied af-
ter all other deduction limits have been
applied (such as the 50% limit on meal
expenses).
 5) You generally must complete Form 2106
or 2106–EZ first to figure your expenses
for education if they include meals and
transportation expenses or if you receive
reimbursement from your employer.
Qualified performing artist. Even if you were
not reimbursed, you must file either Form
2106–EZ or 2106 if you are a qualified per-
forming artist. See Publication 529 for more in-
formation about a qualified performing artist.
Impairment-related work expenses. Even if
you were not reimbursed, you must file either
Form 2106–EZ or 2106 if you are an individual
with a disability claiming impairment-related
work expenses. See Publication 529 for more
information about impairment-related work
expenses.
Employee Forms
(Form 2106 or Form 2106–EZ)
If you are an employee and item (5) of the pre-
ceding list indicates that you must first figure
your qualified educational expenses on Form
2106 or Form 2106–EZ, the following informa-
tion should help you decide which form to use.
You may be able to use the simpler Form
2106–EZ, as explained next.
Form 2106–EZ. You can use this form only if
all the following apply:
1) You are an employee deducting job-re-
lated business expenses (including quali-
fied educational expenses),
2) You are not reimbursed by your employer
for any expenses (amounts your em-
ployer included in box 1 of your Form W–2
are not considered reimbursements), and
3) If you are claiming vehicle expense,
a) You own your vehicle, and
b) You use the 1996 standard mileage
rate and have used the standard mile-
age rate since you first used the vehicle
in your business.
Form 2106. You use this form if:
1) You are an employee deducting job-re-
lated business expenses (including quali-
fied educational expenses), and
2) You were reimbursed by your employer
for your expenses (amounts your em-
ployer included in box 1 of your W–2 are
not considered reimbursements), or
3) You are claiming vehicle expense,
a) You used the actual expense method in
the first year you used your vehicle for
business,
b) You used the 1996 standard mileage
rate and have used the standard mile-
age rate since you first used the vehicle
in your business, or
c) You used a depreciation method other
than straight line for this vehicle in a
prior year.
Reporting amount. If you use Form 2106–EZ
or 2106, that form will tell you where to enter
on Form 1040 the amount you figured.
Forms not required. You do not have to com-
plete Form 2106 if your reimbursement not in-
cluded in box 1 of Form W–2 is at least as
much as your deductible expenses. Do not de-
duct the expenses or report the reimburse-
ment as income.
If your qualified educational expenses do
not include any expenses for travel, transpor-
tation, meals or entertainment, and you were
not reimbursed for any expenses, you do not
have to complete Form 2106–EZ or 2106.
Instead, follow the Form 1040 instruction
to enter your unreimbursed expenses for any
tuition, books, supplies, or lab fees directly on
Form 1040, Schedule A, line 20.
Employer-Provided
Education
If you receive educational assistance benefits
from your employer, part or all of the benefits
may be tax exempt.
You can exclude up to $5,250 of the bene-
fits from income if you receive them under a
qualified educational assistance program.
Your employer can tell you if the program is a
qualified program.
Educational assistance. The exclusion of
benefits under an educational assistance pro-
gram, which expired for tax years beginning af-
ter 1994, has been extended. It will now expire
for tax years beginning after May 31, 1997.
The exclusion of benefits under this program
applies only to expenses paid for courses that
begin before July 1, 1997. However, the exclu-
sion does not apply to graduate level courses
(discussed later) that begin after June 30,
1996. The amount you can exclude from in-
come under this program is limited to $5,250
per year. The education does not have to be
work related for the benefits to be excluded.
If you received more than $5,250 of bene-
fits for the year, the amount over $5,250 is tax-
able and must be included in your income, un-
less it qualifies as a working condition fringe
benefit. See Excludable fringe benefit, later.
Defined. Educational assistance includes
payments by your employer for tuition, fees
and similar payments, books, supplies, and
equipment. It does not include payments for
meals, lodging, transportation, or tools or sup-
plies (other than textbooks) that you can keep
after completing the course of instruction. It
does not include payments for education in-
volving sports, games, or hobbies unless the
education:
1) Has a reasonable relationship to the busi-
ness of your employer, or
2) Is required as part of a degree program.
Graduate level course. Educational as-
sistance does not include any payments by
your employer for a graduate level course nor-
mally taken under a program leading to a law,
business, medical, or other advanced aca-
demic or professional degree, if the course be-
gins after June 30, 1996.
Excludable educational benefit program. If
you receive tax-exempt benefits under your
employer’s qualified educational assistance
program, you cannot take a deduction or
credit for the amount of those benefits.
Excludable fringe benefit. If your employer
provided you with education that was not ex-
cludable from your gross income under the
employer’s qualified educational assistance
program described earlier, your employer can
exclude the value of it from your income if, and
only if, it qualifies as a working condition fringe
benefit. A working condition fringe benefit is a
benefit which if you had paid for it, would have
been deductible by you as a trade or business
expense incurred as an employee of the em-
ployer. For more information on fringe bene-
fits, see Chapter 4 of Publication 535.
Refund Procedure
for Employees
The annual exclusion from income of up to
$5,250 of employer-provided educational as-
sistance benefits, which expired for tax years
beginning after 1994, was extended. It will now
expire for tax years beginning after May 31,
1997. You may be entitled to certain refunds
because of this extension. These refunds
would be for federal income, social security,
and Medicare taxes paid on excludable edu-
cational assistance benefits provided in 1995,
and for social security and Medicare taxes
paid on excludable benefits provided in 1996.
Those not entitled to refunds. If your em-
ployer continued to exclude these benefits
from your income after December 31, 1994,
you have not overpaid taxes on educational
benefits and, are not entitled to a refund.
Employee income tax refunds. If you are en-
titled to an income tax refund for 1995 be-
cause your employer did not exclude em-
ployer-provided educational assistance from
your gross income, you can claim a refund by
filing Form 1040X, Amended U.S. Individual
Income Tax Return. To do this, you need a
Form W–2c from your employer showing the
corrected wages.
To speed up the processing of these
amended returns, print ‘‘IRC 127 ’’ in the top
margin of Form 1040X. Next, enter your name,
address, social security number, and tax year
on the Form 1040X, sign the form, and attach
your Form W–2c. The IRS will figure the refund
based on the W–2c information provided and
will process these amended returns as quickly
as possible.
If your employer excluded employer-
provided educational assistance from
your gross income, you cannot de-
duct these educational expenses.
Earned income credit. If your Form W–2c
shows corrected wages of less than $26,673
Page 7
for 1995, you may qualify for the earned in-
come credit. If you qualify for the credit in 1995
but did not claim it, and you have a qualifying
child, attach a completed Schedule EIC to the
Form 1040X. If you already received the credit
for 1995, do not complete another Schedule
EIC. The IRS will automatically refigure the
credit for you.
Employee social security and Medicare tax
refunds. For 1995 and 1996, If you are enti-
tled to an income tax refund, discussed earlier,
you can request reimbursement of social se-
curity and Medicare taxes from the employer
who provided the educational assistance. Em-
ployers may add these reimbursements to
your paychecks or make separate payments.
If your 1995 wages (not counting educational
assistance) exceeded $61,200, you would not
have been subject to social security tax on the
educational assistance payments. In that
case, you would only be entitled to a Medicare
tax refund.
In the unusual case that you are not able to
get a refund of these taxes from your em-
ployer, file a Form 843, Claim for Refund and
Request for Abatement, with the IRS. If you
use Form 843, attach to the form a statement
from your employer listing any amount your
employer reimbursed you and any amount
your employer claimed (or authorized by you,
to be claimed by the employer). If you cannot
get this statement from your employer, you
must make the same statement (to the best of
your knowledge and belief) and also explain
why you could not get the statement. As with
Form 1040X, write ‘‘IRC 127’’in the top margin
of Form 843 to speed up the processing of
your claim.
Effect on retirement programs and IRAs. If
you are entitled to a refund for 1995 because
of the change in taxation of educational assis-
tance benefits, retirement programs and indi-
vidual retirement arrangements (IRAs) are
permitted to include the educational assis-
tance (that would otherwise be excluded) in
your 1995 income. In addition, if you made
nondeductible contributions for 1995 to an
IRA, the reduction in adjusted gross income
that may result from excluding educational as-
sistance benefits, may allow you to treat previ-
ously nondeductible 1995 IRA contributions
as deductible. To do this, put the correct non-
deductible contribution amount on Form 8606
and attach it to Form 1040X.
Page 8
Recordkeeping
You must keep records as proof of any deduc-
tion claimed on your tax return. Generally, you
should keep your records for 3 years from the
date of filing the income tax return and claim-
ing the deduction. A return filed early is consid-
ered as filed on the due date.
If you are an employee who is reimbursed
for expenses and you give your records and
documentation to your employer, you do not
have to keep duplicate copies of this informa-
tion. However, you should keep your records
for a 3-year period if:
1) You claim deductions for expenses that
are more than your reimbursement,
2) Your employer does not use adequate ac-
counting procedures to verify expense
accounts,
3) You are related to your employer, or
4) Your expenses are reimbursed under a
nonaccountable plan.
Examples of records to keep. If any of the
above cases apply to you, you must be able to
prove that your expenses are deductible. You
should keep adequate records or have suffi-
cient evidence that will support your ex-
penses. Estimates or approximations do not
qualify as proof of an expense. Some exam-
ples of what types of evidence can be used to
help prove your expenses are:
● Documents such as transcripts, course de-
scriptions, catalog, etc., showing period of
enrollment in educational institutions, prin-
cipal subjects studied, and description of
educational activity.
● Canceled checks and receipts to verify
amounts you spent for tuition and books,
meals and lodging while away from home
overnight for educational purposes, travel
and transportation, and other educational
expenses.
● Statement(s) from your employer explaining
whether the education was necessary for
you to keep your job, salary, or status; how
the education helped maintain or improve
skills needed in your job; how much educa-
tional expense reimbursement you re-
ceived, identified by kind of expense; type
of certificate and subjects taught, if a
teacher.
● Complete information about any scholar-
ship or fellowship grants, including amounts
you received during the year.
Example —
Filled-In Form 2106
Victor Jones teaches math at a private high
school in North Carolina. He was selected to
attend a 3-week math seminar at a university
in California. The seminar will improve his
skills in his current job and is qualified educa-
tion. He was reimbursed for his expenses
under his employer’s nonaccountable plan, so
his reimbursement of $2,100 is shown in-
cluded in the wages on his Form W–2. Victor
will file Form 1040.
His actual expenses for the seminar are as
follows:
Lodging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,050
Meals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526
Airfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550
Taxi fares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Tuition and books . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
Total Expenses $2,576
Victor files Form 2106 with his tax return.
He enters $1,650 ($1,050 + $550 + $50) on
line 3 to account for his lodging, airfare, and
taxi fares. He enters $400 on line 4 for other
work-related educational expenses. On line 5,
Victor enters $526 for meal expenses.
Since his reimbursement was reported as
wages on Form W–2 by his employer, he
leaves Step 2 blank. He carries down the
figures from Step 1 and completes the calcula-
tions required for Step 3. The completed filled-
in form is shown near the end of this
publication.
The amount on line 10 ($2,313) is the
amount that Victor will enter on line 20 of his
Schedule A (Form 1040). He will report all of
the $2,100 shown on his Form W–2 as income
on line 7 of Form 1040.
Page 9

How To Get More
Information
You can get help from the IRS in several ways.
Free publications and forms. To order free
publications and forms, call 1–800–TAX–
FORM (1–800–829–3676). You can also write
to the IRS Forms Distribution Center nearest
you. Check your income tax package for the
address. Your local library or post office also
may have the items you need.
Page 10
For a list of free tax publications, order Tax questions. You can call the IRS with your
Publication 910, Guide to Free Tax Services. It
also contains an index of tax topics and re-
tax questions. Check your income tax package
or telephone book for the local number, or you
lated publications and describes other free tax can call 1–800–829–1040.
information services available from IRS, in-
cluding tax education and assistance TTY/TDD equipment. If you have access to
programs. TTY/TDD equipment, you can call 1–800–
If you have access to a personal computer 829–4059 to ask tax questions or to order
and modem, you also can get many forms and forms and publications. See your income tax
publications electronically. See Quick and package for the hours of operation.
Easy Access to Tax Help and Forms in your in-
come tax package for details. If space permit-
ted, this information is at the end of this
publication.